At meetings held in Dubai between the Reserve Bank of India and the Central Bank of the UAE last week, the UAE regulator raised concerns that banks operating in Dubai’s special economic zone would prioritize India’s fundraising efforts at the expense of serving local customers, the people said, declining to be identified as the talks are private.
The RBI and the Central Bank of UAE did not respond to emailed requests for comment.
Under India’s special program announced in June, the RBI is offering full hedging-cost support for banks raising three- to five-year foreign-currency deposits — and allowed borrowing against such funds. Lenders are offering depositors interest rates as high as 7.5% as the central bank is subsidizing the plan.
The UAE is a key market for Indian banks looking to raise the overseas deposits as the region accounts for about one-fifth of remittances to the country. Lenders have launched a campaign to target the 35-million-strong global diaspora as India seeks to bolster its foreign exchange reserves and support a battered rupee.
The drive revives a playbook last used by banks during the 2013 taper tantrum, when India mobilized about $34 billion from the diaspora to stem the rupee’s decline. Bankers and analysts expect the current scheme to draw in about $50 billion in deposits.
As the Middle East conflict flares up, UAE regulators have also warned some smaller banks against offering aggressive leverage to Indian lenders due to concerns over excessive capital outflows, said the people. RBI officials have pointed to the sound financial conditions at Indian banks and the deepening political and economic ties between the two countries, the people said.Indian media has reported that restrictions by the UAE’s central bank on representative offices could dampen expectations of strong dollar deposits from UAE-based non-resident Indians.
Indian banks are increasingly tapping foreign lenders for dollars, a move that has raised their cost of borrowings and makes it difficult for smaller banks to offer leverage under the plan. Higher funding costs reduces the returns local banks can offer overseas depositors.
Officials from both central banks also discussed steps to ease the time frame for due diligence processes handled by UAE-based banks for wealthy customers, said the people.
The overseas outreach by Indian authorities comes as policymakers ask state-owned banks to step up foreign-currency deposits. Earlier this week, Finance Minister Nirmala Sitharaman urged government-run lenders to boost engagement with non-resident Indians. India’s central bank governor also met with heads of state-run and select private banks to discuss industry matters.
The back-to-back meetings took place as the war in the Middle-East pressures is putting further strain on Indian assets, including the rupee, and is eroding valuable foreign exchange reserves.
In order to garner $60 billion-$80 billion, banks will need to further raise deposit rates, which, according to Jefferies, is not yet attractive. A 20-30 basis points increase in rates by banks can improve investor return by over 200 basis points, the firm said in a note, adding that lenders can also offer differentiated rates to larger clients to mobilize sizeable funds.